Fourth Bank Failure of 2020 - Another Bank With Pre-Pandemic Issues

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Kansas state regulators closed Almena State Bank late Friday, October 23. This is the fourth bank to fail in 2020, and it’s the third bank to fail since the COVID-19 pandemic began in March. Like the first and second bank that failed during the pandemic, Almena State Bank had major problems long before this year. According to the FDIC press release:

The failed bank experienced longstanding capital and asset quality issues, operating with financial difficulties unrelated to the current economic conditions resulting from the pandemic.

Even though the pandemic may not be to blame for this bank’s failure, it should be noted that this failure occurred only one week after the previous bank failure (the October 16th failure of First City Bank of Florida). It does suggest that the pace of failures may be on the rise after the previous nine months in which only three banks failed.

The pandemic will likely result in a large increase in loan defaults and other conditions that will stress banks. Help from the Federal Reserve, the Treasury, the FDIC and other regulators should prevent mass bank failures, but the number of bank failures will likely increase over the next year. An example of what may occur can be seen in the bank failure data during and after the 2008 Financial Crisis. This is shown below.

Number of bank failures around the time of the 2008 Financial Crisis:

  • 2006: 0
  • 2007: 3
  • 2008: 25
  • 2009: 140
  • 2010: 157

Most banks failed in 2010, two years after the crisis reached its climax in 2008. Thus, it will likely take some time before we see the first bank failure that’s the result of the COVID-19 crisis.

We are still in a relatively calm period for bank failures that began in 2015. From 2015 to 2019, there have been no years in which more than 8 banks have failed. No banks failed in 2018, and only four failed in 2019.

Details of the Almena State Bank failure

The FDIC handled the closure of Almena State Bank in a very similar way it handled last week’s closure of First City Bank of Florida. According to this FDIC press release, “To protect depositors, the FDIC entered into a purchase and assumption agreement with Equity Bank of Andover, Kansas to assume all of the deposits of Almena State Bank. The two branches of Almena State Bank will reopen as branches of Equity Bank on Monday, October 26.”

All deposits, even brokered deposits over $250k, are safe

All deposits were transferred to the new bank. This includes deposits above the FDIC coverage limits. It also includes brokered deposits above the FDIC limits. This is described in the FDIC’s FAQs:

No one lost any money on deposit as a result of the closure of this bank. All deposits, regardless of dollar amount, were transferred to Equity Bank.

[...]

The total of all deposit accounts, including brokered deposits, has been assumed by Equity Bank

Both insured and uninsured deposits that were held at Almena State Bank were transferred to Equity Bank. Thus, even depositors who had over the insurance limits had no loss in this failure. Acquiring banks have often decided not to assume brokered deposits, but that’s not the case this time. Even brokered deposits were assumed by Equity Bank.

Past cases when all uninsured deposits were at risk

Occasionally, banks fail and uninsured deposits directly held at a bank are not covered. That happened last year in the first 2019 bank failure. In that case, the acquiring bank only agreed to assume insured deposits. Depositors who had over the insurance limits were at risk of losing some or all of their uninsured deposits. In previous years, banks have also failed without an acquiring bank. In those cases, the FDIC liquidates the bank and sends checks to depositors of only their insured deposits.

Customer access to deposits

Another benefit when the FDIC arranges for an acquisition of a failed bank is that the new bank will typically allow customers of the failed bank to continue to use their accounts without any immediate changes. According to Equity Bank’s customer FAQs on the acquisition:

What will happen to my accounts?

We will work to consolidate internal systems and software over the next few weeks and we will keep you updated right here. Once completed, Almena State Bank accounts will become Equity Bank accounts. We expect no service interruptions with your accounts. Until this time, please continue to use and access your accounts as you always have.

You may still use checks, may still bank in the same location, and debit card service will be uninterrupted.

We will be corresponding with every customer, including a detailed brochure that explains any customer steps during the change, and we'll update you right here, on this page, with important dates and milestones.

CD rates may be reduced

For this bank failure, the only concern for depositors are those with CDs that had high rates. Almena State Bank had been offering 5-year CDs with yields as high as 1.85% in 2019. Those rates may not last as the FDIC describes in its FAQs:

Interest on deposits accrued through close of business on October 23, 2020, will be paid at your same rate. Almena State Bank’s rates will be reviewed by Equity Bank and may be lowered; however, you will be notified in writing of any changes. You may withdraw funds from any transferred account, regardless of whether your interest rate changes, without early withdrawal penalty until you enter into a new deposit agreement with Equity Bank.

Cause of the failure

DepositAccounts.com had given Almena State Bank an “F” grade on its financial health based on data from its June 30, 2020 call report. The bank had a very high Texas Ratio of 213%. It also had a very high Texas Ratio a year ago (105%). Any bank with a Texas Ratio greater than 100% is considered at risk.

The failure of Almena State Bank differed from the first bank that failed in 2019 and the last bank to fail in 2017. In both of those cases, fraud was the primary cause of the failures. Due to the fraud, the financial health grades didn’t help predict the failures. Also, the fraud caused the acquiring banks to decide to only assume the insured deposits. Customers at those banks with uninsured deposits were at risk of losing those deposits.

Those previous two bank failures were an important reminder why everyone should make sure that their deposits (total of both principal and interest) are kept below the FDIC and NCUA insurance limits at each of their banks and credit unions.

Credit union liquidations and conservatorships

So far this year, one small credit union has been liquidated and a small credit union has been placed into NCUA conservatorship. I reviewed those actions in my previous bank failure review.

External references:

DepositAccounts references:

Related Pages: bank health ratings

Comments


#1 - This comment has been removed for violating our comment policy.
milty
  |     |   Comment #2
(I would say the party is over after too many of your population is dead. Where I live small businesses and schools reopened and then closed again . . . the virus has not yet left the building.) But let's stick to this article's major point: "The failed bank experienced longstanding capital and asset quality issues, operating with financial difficulties unrelated to the current economic conditions resulting from the pandemic." 
alan1
  |     |   Comment #3
from American Banker, October 23

"Almena had lost more than $9.3 million since 2018 and had not turned an annual profit since 2017, according to FDIC data."

https://www.americanbanker.com/news/regulators-close-kansas-bank-in-fourth-failure-of-2020
#5 - This comment has been removed for violating our comment policy.
Ally6770
  |     |   Comment #7
My youngest son has been working from home for almost 3 years by choice. He goes in when he wants to see everyone and enjoy a day working with the employees in his department. Even when he drives up to visit he brings 3 computers with him. At night he hooks them up and they update one anther. He even trained 3 people at the same time from home, one who lives in Michigan, one in Florida and one who lives in India. My other son is a doctor and did many computer visits and for the more hands on patients they made appointments for a few days of the week and he went in. I had to have a visit with my cardiologist and 2 my internist but in and out and I think I probably could have had a computer visits, but they said to come in. I only have one neighbor who goes back to work instead of at home but it is because his wife is homeschooling the three kids and he can concentrate more at work. He works at Stryker. Even the people working at Kelloggs or in the PNC computer center, the credit card center and the call center are working from home or at the big complex if they choose and many other banks and credit unions are working from home. Even a bank in upstate New York that I deal with the employees are mostly still working from home. The people overseeing the computers etc are still working in house. They had an update and put my monthly interest from one of 10 years CD's in my checking account this month instead of compounding it and was able to fix it. It is the restaurants, the entertainment places, the workers in the hotels, the bars, movie theaters, bowling alleys some self employed hands on people like barber shops hair salons etc that are in trouble and need help and unemployment insurance. Even the grocery stores are doing great around here. Most still have the early hours for the sick, first responders and elderly. Employees can still work overtime if they want. Fed EX, UPS, Amazon vans and the white vans and the post office employees are again working overtime delivering packages on my street which has only 33 houses and one way in and out. The school my grandchildren go to closed down as of yesterday. 8 kids and staff infected and 150 are in quarantine with only going to school mornings, wearing masks, and 8 to 10 in each classroom. I even take them to school and pick them up so they do not have to ride the bus. But we all wear N95's that I bought very early when you could still get them in the stores and medical supply houses. There are people who can work from home and the essential workers who have to work. The rest we need to take care of. If people do not stay healthy there will be no economy. HEALTH ALWAYS COME FIRST. WE CAN FIX MEALS, BABYSIT, DO ERRANDS, AND HELP THE ESSENTIAL WORKERS SO THEY CAN STAY HEALTHY AND IN ESSENCE HELP US.
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Sherlock
  |     |   Comment #21
Encouraging a functioning economy includes controlling the covid -19 virus spread. As Fed Chairman Powell has said " key thing for the economic recovery ... is to get the spread of the disease well and truly under control. And that was always going to be very important in supporting, as rapid as possible, a reopening, a sustainable reopening of the economy." He also said " there's actually enormous economic gains to be had nationwide from people wearing masks and keeping their social distance."
https://www.npr.org/2020/09/04/909590044/transcript-nprs-full-interview-with-fed-chairman-jerome-powell
Our state has decreased from a high of 1,693 hospitalizations in April to 455 hospitalizations today.
We closed down early and very slowly opened up. Our county which was hit harder than some other counties have stricter rules. We have a mask mandate and social distancing for all indoor activities, transportation and for any outdoor activity where social distancing is not possible. Fines are given for any businesses not following mandates. Enforcement-Several restaurants getting 3 fines and warnings, have been closed. Curbside pick-up has been popular for all businesses, working from home for many employees , closed streets and closed parking lots have helped restaurants and businesses expand their businesses outdoors, public swimming pools with staggered appointments, recreational centers giving outdoor classes social distancing etc. Doctors and dentists have also taken health precautions seriously by staggering appointments and following ADA and AMA recommendations. Covid testing and contact tracing is done regularly. All these actions have given people more confidence in venturing out, helping our economy.
Our county political leaders are following CDC guidelines, making all health information easily available. That's the prescription for a healthy economy
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